The Gym Group (GYM) is hoping to open new gyms alongside supermarkets as part of an expansion plan that could see earnings surge over the coming years.
It wants to capitalise on supermarkets’ spare property space, large footfall and free parking.
It has already opened a few sites alongside Sainsbury’s (SBRY) supermarkets with great success and is now seeking future opportunities.
The £257m market cap leisure stock has 89 low costs gyms in the UK and has already secured 17 new sites to open in 2017. It has guided for openings to be at the upper end of its 15 to 20 annual roll-out target this year.
WHY THE SHARES FALL TODAY
Its share price slips 3.1% to 194p despite reporting a seemingly-upbeat trading statement. There are two reasons behind this movement.
On one hand, the stock has already enjoyed a New Year rally with 18% share price gain up to 11 January. Therefore today’s pull back could simply by a mild bout of profit taking.
Other the other hand, The Gym Group has opened fewer sites in 2016 than analysts had expected. Its 15 new openings are two short of Numis’ forecast for 17 new gyms.
That prompts the broker to downgrade its EBITDA (earnings before interest, tax, depreciation and amortisation) forecast for the 2016 financial year by 1%.
NET DEBT IS FALLING RAPIDLY
We don’t consider the rate of new openings as anything to be worried about. Fifteen is still a healthy number in terms of expansion and it means £5.2m year-end net debt is £5.7m lower than expected.
The Gym Group funded all of 2016’s new openings from cash flow and chief financial officer Richard Darwin tells us that 2017’s expansion should also be mostly funded from cash.
Chief executive John Treharne says the company can be quite clever in terms of where it opens new gyms, saying previous sites have included an old nightclub, a casino, an office and retail outlets.
EARNINGS ARE SET TO SOAR
Numis forecasts 7.7p earnings per share for 2017. The stock at 194p is therefore trading on 25.1 times earnings. Yes, that’s a high price to earnings (PE) multiple - but this is a rapid growth story so PE perhaps isn’t the best way to value the stock.
Earnings per share is forecast to more than triple between 2015’s 3p and 9.9p forecast for 2018. Numis has an EV (enterprise value)/EBITDA valuation of 8.8 for 2017, falling to 7.1 which is far from demanding given the aggressive roll-out story.
